401(k) Newsletter - Fourth Quarter 2017

In the NewsTax Reform and Retirement PlansThe Republican tax reform proposal announced on September 27, 2017 made no change to the tax-deductibility of employer and employee contributions into 401(k) plans.

There had been much speculation, in the lead up to the tax reform announcement, whether the tax-deferred nature of 401(k) contributions would be eliminated or reduced in order to help pay for the $1.5 trillion in estimated tax cuts contained in the tax reform proposal. Congress is now working to release a draft bill of tax reform legislation by November 13, 2017. We will continue to monitor the situation and alert you to any change in the tax treatment of 401(k) contributions.

Administration TidbitsForm 5500 and 8955-SSAFor calendar-year plans currently on extension, Monday, October 16, 2017 is the deadline to file the Form 5500 and Form 8955-SSA. If you are unsure as to the status of your Plan’s Form 5500 or Form 8955-SSA, you are invited to contact our team for assistance.

Year-End Participant NotificationsAs we wrap up 2017, we would like to remind you of some important annual notices that may need to be delivered to Plan participants, depending on the provisions of your Plan. Below is an outline of these notices, along with the corresponding due dates, based on a calendar-year Plan.

Market CommentaryThe trend of improving global economic and monetary conditions that we highlighted in last quarter’s newsletter continue unabated. Improving economic growth and corporate earnings in the US, overseas developed markets and emerging markets continue to support equity markets. This economic growth and buoyant markets are allowing central banks to move from quantitative easing to balance sheet restructuring with only a gradual rise in interest rates. Conditions seem favorable for these trends to continue into 2018.

Both overseas emerging market and developed market equities continue to outpace US equity markets. At the end of September, MSCI Emerging Market Index up 28.1%, MSCI EAFE Index up 20.5%, compared with the US S&P 500 Index up 14.24%. Overseas valuations continue to be attractive with the ACWI ex-US index trading at 14.2x book compared with a 20-year average of 14.6x, while the S&P 500 is at 17.7x, 9% above its 20-year average of 16.0x.

In the US, the post-election equity rally has continued. Part of this has been from improving economic data and part of it from stimulus spending and the expectation of tax reform. The natural disasters in the US have not had the negative impact on growth originally expected. Rebuilding from Hurricanes Harvey and Irma is expected to buoy Q3 economic growth to around 2.5%, and on through the end of the year. This could result in 2017 GDP growth at 2.2%, up from the 1.6% growth recorded in 2016. Earnings growth has also been very healthy, helped by rising energy prices and a weakening US dollar, and is expected to continue to be double digits through 2017. The markets got a further boost over the summer from the prospect of both corporate and individual tax reform. Taken together, US and overseas economic conditions and markets are very healthy.

Global GDP grew at an annualized rate of 5.7% through Q2 2017, the best result since 2011, with the Eurozone economies growing at 2.3%. European unemployment continues to fall, registering 9.1% in August 2017 (down from a high to 12.1% in 2013) and loan demand in Europe remains strong. The forward-looking Global Purchasing Managers’ Index stands at 53.3, indicating an acceleration of global manufacturing demand, with the highest figures shown by Germany, France and the UK at 60.6, 56 and 55.9, respectively. A similar situation exists in emerging market economies, with China leading the way with 6.9% annualized GDP growth through Q2 2017. China has also made progress in its credit and interest rate markets, with inflation at 1.8% YOY in August down from 2.5% in January.

If there is a cloud on the horizon, it is the continued low level of US fixed income markets. The 10yr Treasury yielded 2.33% at the end of September, down from 2.40% right after the Fed’s last rate hike in June. In September, the Fed stated that it will continue raising interest rates (once more in 2017 and three times in 2018), and will begin reducing its balance sheet in October 2017, to the tune of $10B per quarter up to $50B per quarter by October 2018. That would mean the private sector having to fund two times the annual US Government budget deficit over the next two years. In addition, there is the possible impact on the Federal deficit of the proposed $1.5T in tax cuts. The Congressional Budget Office baseline estimate (i.e., no change in legislation) is that the annual Federal budget deficit will increase from the current 3.6% to 5.2% of GDP by 2027, with the net Federal deficit rising from the 76.7% to 91.2% of GDP in the same period. Tax cuts, without an uptick in economic growth, would push the Federal deficit beyond baseline estimates, increasing upward pressure on US interest rates.